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What are the benefits of a licensed stock exchange?
June 10, 2021

Catalist recently announced the launch of a new licenced stock exchange, the Catalist Public Market, specifically designed for New Zealand’s small and medium-sized businesses (SMEs). So, what’s the big deal?

New Zealand already has a stock market for larger businesses, the NZX, and company shares can already be bought and sold privately, so why will a licensed market for SMEs make such a big difference? As the only licensed stock exchange in New Zealand, other than the NZX, we hope to have answered that question by the end of this blog post.

Complete and trustworthy information

A key difference of licensed markets is the level of information disclosed to investors. There’s a general rule, contained in part 2 of the Financial Markets Conduct Act 2013, that anyone selling financial products has to be truthful about those products and can’t mislead buyers. However, there’s a big difference between being truthful and telling investors everything they need to know.

For most private investments outside a licensed market, there’s no requirement for a business to disclose negative information. This includes wholesale investments (investments targeted at large and experienced investors), offers made available through crowdfunding platforms, or exempt offers made through unlicensed trading platforms. It’s up to the investor to ask questions and do their own due diligence. As long as the business doesn’t lie or imply that there is nothing wrong, they are perfectly entitled to omit bad news. This is why the common mantra in private markets is ‘buyer beware’ – do your homework, ask questions, and be prepared that someone else might know something you don’t.

A licensed market turns that on its head. Just like on the NZX, SMEs listed on the Catalist Public Market are legally obliged to tell you everything you’d expect to affect the price of the investment. This is supported by specific legislation that only applies to licensed markets – with potential for questions from the Financial Markets Authority (FMA) if the business breaches those obligations.

However, it’s not in investors’ best interest that these smaller businesses spend significant time and money constantly updating their information disclosures – that would take the focus off running their business and have a negative impact on the investment. Investors want to be able to trust the information they’re getting without putting a too heavy burden on these smaller businesses. Catalist keeps the costs low for businesses by restricting trading to periodic auctions, so businesses only need to update information each time an auction comes around. This may only be a couple of times a year – a much lower burden on the business whilst also maintaining the protections investors need.

Accessible investments for every New Zealander

Most investments outside of a licensed market are restricted, meaning not everyone can invest. For example, many investment opportunities fall within the ‘wholesale’ category, which means they’re only offered to professional or wealthy investors. The average New Zealander misses out on the wealth-generating opportunities available to well-off investors. Businesses also lose because the limited pool of investors makes it harder to raise the capital, which can impact pricing.

As well as the legal restrictions on who can invest, private investment opportunities often have practical restrictions that prevent bigger professional investors, such as KiwiSaver funds, investing. This is because the costs of analysing the investment opportunity are often not justifiable, given the size of the investment. So, outside a licensed market, even experienced investors have to take a buyer-beware approach, which increases their due diligence costs.

The Catalist Public Market is unique in the way it gives direct access to all types of investors. It allows everyone from regular New Zealanders through to the largest of professional investors, to access investments they wouldn’t otherwise be able to, in a well-regulated environment with comprehensive information.

Simple online access, easy bidding at periodic auctions, and paperless transactions are just some of the features that make the investment process easy. Investors can focus on making the most of the investment opportunities they are interested in, and businesses can focus on their day-to-day operations, outside of auctions, with the ability to manage and maintain high-quality periodic engagement with their investors.

A fair and orderly market

A licensed market means Catalist has approved systems and processes in place to ensure our market remains fair, orderly and transparent. This includes automated and manual monitoring of trading, as well as legislative protections against manipulation and insider trading. This helps build trust from investors that the market is giving everyone the same fair opportunities and prices.

Periodic auctions are one of Catalist’s key features in maintaining a fair and orderly market. They not only help to make investing simple, but they’re also designed to incorporate sophisticated protections that automatically enhance fairness for investors. Examples include:

All investors get the same price at the end of each auction – calculated from the total supply and demand.
‘Sniping’ is minimised – where a bidder submits a new best price in the last seconds of an auction – through a pre-closing period, automatic auction extensions, and an end time that is randomised by a few minutes.
Investors can use our simple auto bid feature to ensure they have the best chance of trading, without having to actively monitor auctions, and without worrying about other investors having the unfair advantage of knowing their best price.

There’s also rules around related parties disclosing their interests, which further support transparency and fairness.

Interested?

Do you want to get involved in investing in previously inaccessible SMEs, with the protections of a licensed market? Investors can sign up for a Catalist account and opt in to our newsletters to receive notifications when new investment opportunities become available.

If you have a business that could benefit from listing on a licensed market and accessing a wider pool of investors, you can get in touch for more information.

By Colin Magee